Offshore Yuan Trade – Not Profitable, Yet

There’s still some way to go before Hong Kong’s banks start reaping big rewards from the promise of the

Reuters

growing offshore yuan business.

The latest kink in the offshore yuan trade came after the Hong Kong Monetary Authority issued new rules, according to Peter Stein and Fiona Law in Tuesday’s WSJ. The rules restrict banks’ net open positions in the yuan to 10% of their assets or liabilities in that currency. Bankers say that could potentially limit the ability for lenders to offer derivative products and reduce the liquidity of yuan in Hong Kong.

The new rules come as bank’s were already struggling to make money from the yuan on their books. The ballooning yuan deposits in Hong Kong – 290 billion yuan as of November – are “a near-term drag on Hong Kong bank margins and profitability,” according to Barclays Capital. The problem: banks don’t have enough places to lend out all that yuan and earn interest.

Here’s an idea of how unprofitable the yuan business is so far. BarCap says deposits parked with the People’s Bank of China via the clearing bank, BOC Hong Kong (Holdings) Ltd. return 0.865%, but some banks are paying more than 1.5% to customers in interest with a one-year yuan time deposit.

Of course, the hit on profibtability overall is limited because yuan holdings are still just 4.8% of total system deposits in Hong Kong. And it’s a loss leader banks are willing to tolerate.

“Banks take a short-term opportunity cost on holding yuan deposits, but it’s still worth it with a long-term view because of the franchise opportunities,” said Sundeep Bhandari, regional head of global markets for Northeast Asia at Standard Chartered PLC Hong Kong.

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